FSU Editorial: "Should I be Investing in Australian Mining Stocks?" by Greg Silberman 04/04/2006

SHOULD I BE INVESTING IN AUSTRALIAN MINING STOCKS?
by Greg Silberman
April 4, 2006

About a year ago I decided to open an office in Sydney Australia. I run a little advisory business in Atlanta, Georgia and my thinking went like this:

We’re in a Commodity Bull Market for sure!

Australia is packed FULL with every commodity under the sun. There are regions of Australia which haven’t even been EXPLORED yet.

If the action is going to be in commodities and I want a piece of the action, I need to get a foothold on the Continent DOWNUNDER!

My wife laughed at the idea. She thought I wanted to Surf and watch girls on Bondi Beach. My wife is very perceptive!

Needless to say it’s been a tough year shuttling back and forth but immensely rewarding. Let me save you a year of Trans-Continental travel and fill you in on the Australian Commodity story.

Here’s what you probably know about Australia:

Australians are pretty switched on people. Fiercely competitive and born Winners. There is no Sport in which they participate and don’t totally Dominate!
Australia has a landmass comparable to the United States yet a population of only 20 million, the majority live at the coast.
Australia s a First world country with an extremely stable political system and well established judicial system. Australia is a VERY Law Abiding country.
Australia is English speaking (although you wouldn’t always think so based on the accent) and a first class ally of the United States.
Jim Dines of The Dines Newsletter, who calls himself ‘the Original Uranium Bug,’ recently commented that Australia is about to go through it’s most massive BOOM EVER because it holds 30% of the worlds Uranium reserves.
The Australian Financial Review – a brilliant daily newspaper recently ran an article entitled – Australia, Number 1 Gold Producer in the World.
Australia is the only English speaking country in the Asian time zone and geographically on China’s doorstep.

Ok, so much for Trivia. Tell us something we don’t know!

Sure…

Here’s what you probably don’t know about Australia:

Australia is HIGHLY REGULATED. Society borders on being socialist - Medical is practically free. The result is that the government meddles in every aspect of life and one can get tied in knots by rules and laws (much the same as the USA). Figure this one out, it’s a law that you have to Vote in every election!
Being a socialist country (well almost) the tax burden is incredibly high. 42% on income over US$44,000 and 47% on income over US$65,000. The first thing I did when I opened a branch in Sydney was convert my degree to become an Australian Chartered Accountant. As with all tax codes one MUST be aware of the finer points. For example, there is NO capital gains tax in Australia on Non-residents that buy or sell less than 10% of a Corporations Capital Stock.
Financial services in particular are extremely regulated. Legally speaking one cannot even recommend a stock to a friend without being a registered advisor. The result is that financial services are dominated by the BIG Banks and Institutions (not much different to anywhere else actually).
Here’s an interesting point – there is a law that each employer must place the equivalent of 10% of an employees payroll into a superannuation fund (pension). This has generated a massive flow of funds, mostly into the stock market, over the last 10 years. People believe this flow will support the market forever – yeah right, tell me another one!
Australia was first out the gate with the Housing Boom. Sydney property prices are still astronomical even though they’ve been off the boil for 2 years. The result is a demographic that looks eerily similar to the US in that people are up to their eyeballs in debt. The difference though is that Australians have a much higher debt to income ratio than the US. A TICKING TIME BOMB IF YOU ASK ME!

Ok, Greg, very interesting! But tell us what we DON’T know about Commodities in Australia…

With the institutions dominating the market, it’s really the Big Blue Chips like BHP Billiton and Rio Tinto, which have ALL the following. The reason being that small explorers just don’t have the market capitalisation to interest the Banks.

So who’s trading Juniors?

The small exploration companies, of which there are too many to count, are almost the exclusive preserve of:

Individual Australian investors
Sophisticated foreigners (normally represented by London-based brokers) and
Canadian Mining Companies.

Due to a smaller pool of investors in Australia, valuations tend to be lower than the US or Canada.

Canadian Mining Companies are having a field day here. Swapping their high-priced paper for lower-priced Aussie stock and getting UNBELIEVABLE resource reserves in the process.

Of primary importance to US investors is the return on Australian assets in US Dollars. Chart 1 shows how the Australian ETF handsomely outperformed the Dow Jones since 2002 - I am on record as predicting a major short-term correction however. The Australian ETF is heavily weighted towards commodity stocks. The returns are even more pronounced when looking at Aussie Juniors (not shown).

Chart 1 - Australian ETF vs. Dow Jones

Here’s another important chart to watch, the Aussie $:

Chart 2 - Aussie $ hitting significant resistance

The Aussie $ has been in a consolidation pattern since Jan ’04 and firmly in a downtrend since January ’05. There is good evidence to support the Aussie may be forming a bottom as it encounters heavy support at the bottom trendline (green line), the 50 Month moving average (blue line) and the prior bottom at 70c (red line).

The Aussie $ yields in the region of 5% and is shaping up for an excellent place to park some Cash.

The overall Message is Americans should NOT BE AFRAID of Investing directly in Australia. This can be done through any big online Australian broker – try CommSec or Paterson Securties (I don’t have any financial relationship with these companies).

To fund your account you will have to Wire money to Australia – your bank should be able to facilitate.

I know many Americans are unaccustomed to dealing outside the US, which is why I am working hard on listing a Closed End Investment Fund in the US that invests in Aussie Juniors (Uranium, Gold, Silver etc.).

The Aussie Junior Resource Market is WIDE OPEN for a player of medium size to become the Heavy Hitter. It won’t be long before this opportunity is arbitraged away.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

For more information on Investing in Australia or on my proposed Closed End Investment Fund, please feel free to contact me.

CONTACT INFORMATION
Greg Silberman
USA
Email l http://blog.goldandoilstocks.com/

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.